4 minute read
Question: Before the COVID-19 pandemic, I was already deep in debt. I owed $24,000 on six credit cards because I had a girlfriend (now ex-girlfriend) who insisted we travel all the time. I also have an 84-month auto loan for a Land Rover I shouldn’t have bought in the first place, and I’m not even a third of the way through that.
Then there’s $19,000 left on my student loans and $14,000 left on a timeshare I regret buying with some family. I was barely making payments as it was. Then in May, I got laid off.
I’ve already taken advantage of all delayed payments that my lenders and the government were offering, but that’s not going to last. I don’t know when I’m going back to work, and unlike other people, my unemployment is NOT more than I was making before.
I want to explore bankruptcy, but my family and my new girlfriend are warning me against it. They say my finances will be ruined for a decade and no one will want to hire me when they find out I went bankrupt. They say there’s a “social stigma” that everyone, especially employers, has against anyone who’s declared bankruptcy.
Is this true? If so, what are my options?
– Zach in Ohio
Steve Rhode, the Get Out of Debt Guy, responds…
Yes, there’s a huge social stigma about bankruptcy. I know this for a fact – because I declared bankruptcy myself in 1990. But that was the best thing I could’ve done, and it hasn’t hurt me at all. In fact, it helped me become financially successful – because I learned from my mistakes and didn’t repeat them.
A big part of the problem is what I call the “six myths of bankruptcy.” I won’t get into all of them right now, but here are the three big ones that cause that social stigma:
- You’ll just get on a bankruptcy treadmill. Truth is most Americans who declare bankruptcy never go through it again.
- Bankruptcy will ruin your credit for a decade or more. Actually, those who declare bankruptcy do better over that timespan than those who don’t and just limp along with big financial problems.
- Bankruptcy is a cheap trick for losers. Bankruptcy is mentioned in both the U.S. Constitution and the Bible – as options with rules to help people.
Zach, you seem like bankruptcy might benefit you. I can’t say for sure because such a big decision requires a lot more drilling down. But in general, bankruptcy is the best option for people who are so deeply in debt, there’s no reasonable and rational way they can climb out on their own.
Bankruptcy works well enough that nearly half a million Americans do it every year. I don’t know about you, but I don’t see lots of people walking around with scarlet Bs on their chests.
While we’re here, let’s explain how bankruptcy really works, because while it’s a helpful tool for the right people, it’s always complicated. Using your situation as an example, Zach, let’s review just how complicated it really is…
Bankruptcy costs money
This always floors people. How can it cost money to officially go broke? While it varies state to state (which we’ll discuss in a moment), the total cost can easily exceed $1,000.
The national average is between $310 and $335, depending on what kind of bankruptcy you’re declaring. While you don’t have to hire a bankruptcy attorney, you probably should. That can cost anywhere from $500 to $5,000, depending on where you live – Manhattan, Kansas, will be cheaper than Manhattan in New York City.
Then there’s the required pre-bankruptcy credit counseling and personal financial management course, which can add up to another $100.
Bankruptcy by the numbers
You’ve probably heard the terms Chapter 7 and Chapter 13 when it comes to bankruptcy, but what do they mean? In Zach’s case, Chapter 7 will probably work best. Why? Because Chapter 7 is known as “straight bankruptcy,” and it’s best for people like Zach who no longer have a steady income.
Chapter 13 is often called “repayment plan” bankruptcy because instead of wiping out your debts, it restructures it. I know what you’re thinking: Why would I want to pay back my debts when I can wipe them out?
There are so many pros and cons to each kind of bankruptcy, I won’t get into them here. Check out Choosing the Right Path for a Personal Bankruptcy Filing to learn more. But I’ll mention just a couple.
First, a Chapter 7 bankruptcy stays on your credit report for a decade, while Chapter 13 comes off after seven years. (Read more: What Happens to Your Credit Score after Bankruptcy?)
Second, you can often keep more personal property under Chapter 13 than Chapter 7. While no one is kicking you out of your house, Zach’s timeshare and Land Rover are probably at risk. But he doesn’t seem enamored with either one right now, so that might be just fine with him.
Bankruptcy by debt
Another complicated topic is just what kinds of debts you can shed in bankruptcy. Even if you’ve never thought about the topic, you probably know that bankruptcy doesn’t put you out on the street. You can keep your primary residence and a vehicle to get to work, and often other personal property.
You might’ve heard that federal student loans are impossible to discharge, but that’s not really true. It certainly ain’t easy, but that’s another reason to hire a bankruptcy attorney. Zach doesn’t say if his loans are federal or private, but in each case, if you can prove a hardship, you can get some relief. Again, this is a huge topic to unravel.
Bankruptcy by state
Here’s the last complex topic I’ll tackle: It matters where you declare bankruptcy. While there’s a federal law about bankruptcy, states have their own “exemption laws” that dictate the kinds f property you can keep.
Where Zach is in Ohio, for instance, you can exempt “$1,700 of value in jewelry.” In Oregon, meanwhile, “up to $600 in books, pictures, and musical instruments.” And in the third state that starts with an O, Oklahoma exempts “guns for household use, up to $2,000.”
What to do now
For Zach and anyone else contemplating bankruptcy, you can see just from what I’ve written that it’s a big, complicated decision. But there are experts who can break it down in understandable chunks, and they’ll do it for free. If you call Debt.com at a trained counselor will give you a free debt analysis If bankruptcy is really your best option, they’ll help you through the next step.
For Zach and anyone facing something like his situation, I’ll end with a very simple statement: You aren’t your money. You’re not a bad person because you got in a terrible predicament. Bankruptcy won’t define you.
Talk to a certified professional to decide if bankruptcy is right for you.
Publicado por Debt.com, LLC